COST OF ADVICE

By Dave Thrifty

A friend recently complained about the fees he had paid to his broker in the UK to manage his portfolio over the last year. He has a moderate fund of $60,000 and had paid just under $900 for the last 12 months. He was outraged that they had charged so much and that is in spite of the fact his portfolio had risen by over 11% during the same period.

My friend explained how he had logged on to his online account and when he looked at his “transaction statement” he noticed the monthly charge. When I questioned him about this statement, he explained that it recorded things like the tax reclaims the broker had processed as well as the fund manager commission rebates he received. So it seemed that maybe the charge was not “for just sitting there doing nothing”….

I asked how he came to invest in these particular fund managers and he outlined how the broker researched them and their funds and also how they monitored the performance of the manager, the company they worked for and “events”. He also explained that the broker was regulated in the UK and as a result of this he was protected by the UK investor compensation scheme. He also set out how the funds were held separately by the managers and their custodians who were all regulated and that actually the whole setup was very safe. In any event, he said, these guys are all insured, so at worst if anything goes wrong you can go after their insurers. And remember there’s no tax involved if you’re an expat.

Once he thought it through my friend was eventually happy to acknowledge that paying his broker such a small relative amount for safe custody, online access, manager selection and monitoring, as well as the benefit of investor protection, insurance and even good performance on his portfolio was maybe not such a bad thing! This is a conversation I’ve had a lot in the last few years as more and more of us look at what we spend and the costs of almost everything that comes out of the bank account. Whether its mobile phones, air conditioning or our investment brokers we need to be aware that price isn’t everything.

With “proper” investment firms there is a lot more that they have to do. They have somebody waiting to answer the phone when you call, there’s an alternative broker to speak to if your guy is off sick. They have your file in a fireproof safe and a computerised backup in a Disaster Recovery Site.

I remember being amazed when I learned of the number of meetings the investment managers at Legal & General had each week. I worked with this firm in the UK and for years was completely oblivious to the fact that they don’t just buy shares in companies as an investment. They go through the accounts and projections with a fine tooth comb and that’s before they buy shares or lend the company money. The scrutiny continues after the investment and if anything is more intense.

So when you are thinking about who’s looking after your money, by all means look at the cost in Dollars, Bhatt and Pounds. Remember however that not all brokers are the same and not all products are the same either. Think about what you get for your money – does this have real value?